Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the U.S. and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries' economic fundamentals. This confirms the "wake-up call" hypothesis, with markets focusing more on country-specific characteristics during the crisis. Terms of use: Documents in EconStor may JEL No.: F3, G14, G15Keywords: contagion; financial crisis; equity markets; global transmission; market integration; country risk; factor model; financial policies; FX reserves, current account (Paris, 2012), Q-Group, (Tampa, 2012), and at the EMG-ESRC Workshop on Global Linkages and Financial Crises (Cass Business School, London, 2012) for comments on earlier versions of the paper, as well as Assaf Shtauber and Tadios Tewolde for helpful research assistance. Detailed comments from two anonymous referees and the acting editor (Bernard Dumas) also greatly improved the paper. The views expressed in this paper are solely our own and do not necessarily reflect those of the European Central Bank or the Bank of Canada. 1Ever since the seminal work of King and Wadhwani (1990) following the global October 1987 stock market crash, the international finance literature has studied how shocks are transmitted across borders.Words with negative connotations such as "volatility spillovers" (e.g., Engle, Ito and Lin (1990);Masulis, Hamao and Ng (1990)) and "contagion" have been coined to indicate shock transmission that cannot be explained by fundamentals or co-movements that are viewed as "excessive." Countless papers have been written proposing quantitative measures of contagion (see Karolyi (2003); Dungey et al. (2004), for surveys) or developing theories to explain it (e.g., Allen and Gale (2000)).The financial crisis of 2007 to 2009 has arguably been the first truly major global crisis since the Great Depression of 1929 to 1932. While the crisis initially had its origin in the United States in a relatively small segment of the lending market, the sub-prime mortgage market, it rapidly spread across virtually all economies, both advanced and emerging, as well as across economic sectors. It also affected equity markets worldwide, with many countries experi...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the U.S. and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries' economic fundamentals. This confirms the "wake-up call" hypothesis, with markets focusing more on country-specific characteristics during the crisis. Terms of use: Documents in EconStor may JEL No.: F3, G14, G15Keywords: contagion; financial crisis; equity markets; global transmission; market integration; country risk; factor model; financial policies; FX reserves, current account (Paris, 2012), Q-Group, (Tampa, 2012), and at the EMG-ESRC Workshop on Global Linkages and Financial Crises (Cass Business School, London, 2012) for comments on earlier versions of the paper, as well as Assaf Shtauber and Tadios Tewolde for helpful research assistance. Detailed comments from two anonymous referees and the acting editor (Bernard Dumas) also greatly improved the paper. The views expressed in this paper are solely our own and do not necessarily reflect those of the European Central Bank or the Bank of Canada. 1Ever since the seminal work of King and Wadhwani (1990) following the global October 1987 stock market crash, the international finance literature has studied how shocks are transmitted across borders.Words with negative connotations such as "volatility spillovers" (e.g., Engle, Ito and Lin (1990);Masulis, Hamao and Ng (1990)) and "contagion" have been coined to indicate shock transmission that cannot be explained by fundamentals or co-movements that are viewed as "excessive." Countless papers have been written proposing quantitative measures of contagion (see Karolyi (2003); Dungey et al. (2004), for surveys) or developing theories to explain it (e.g., Allen and Gale (2000)).The financial crisis of 2007 to 2009 has arguably been the first truly major global crisis since the Great Depression of 1929 to 1932. While the crisis initially had its origin in the United States in a relatively small segment of the lending market, the sub-prime mortgage market, it rapidly spread across virtually all economies, both advanced and emerging, as well as across economic sectors. It also affected equity markets worldwide, with many countries experi...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in WO R K I N G PA PE R S E R I E S N O 1381 / S E P T E M B E R Macroprudential Research NetworkThis paper presents research conducted within the Macroprudential Research Network (MaRs). The network is composed of economists from the European System of Central Banks (ESCB), i.e. the 27 national central banks of the European Union (EU) and the European Central Bank. The objective of MaRs is to develop core conceptual frameworks, models and/or tools supporting macro-prudential supervision in the EU.The research is carried out in three work streams: 1. Macro-fi nancial models linking fi nancial stability and the performance of the economy; 2. Early warning systems and systemic risk indicators; 3. Assessing contagion risks.MaRs is chaired by Philipp Hartmann (ECB). Paolo Angelini (Banca d'Italia), Laurent Clerc (Banque de France), Carsten Detken (ECB) and Katerina Šmídková (Czech National Bank) are workstream coordinators. Xavier Freixas (Universitat Pompeu Fabra) acts as external consultant and Angela Maddaloni (ECB) as Secretary.The refereeing process of this paper has been coordinated by a team composed of Cornelia Holthausen, Kalin Nikolov and Bernd Schwaab (all ECB).The paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to fi nal publication. The views expressed in the paper are the ones of the author(s) and do not necessarily refl ect those of the ECB or of the ESCB. ECB Working Paper Series No 1381September 2011 Abstract 4 Non-technical summary 5